Outlook Intact for Tyson After Solid Third Quarter

We expect to lift our valuation for no-moat

Year to date, Tyson reported 1% sales growth and an 8.1% adjusted operating margin, near our 1% and 8.3% full-year marks. The firm indicated it expects around $41 billion in fiscal 2018 revenue, above our $39 billion target, with margins not far from fiscal 2017’s strong year-to-date results.

Management indicated it expects the beef segment (around 40% of fiscal 2016 sales) to post a fiscal 2018 margin near the 5% mark that it foresees in fiscal 2017. While we have a similar target for fiscal 2017, we had assumed a dip to 3.5% in fiscal 2018 as beef prices stabilize. Beef remains at a disadvantage to chicken for health and cost reasons, but we expect China’s June reopening to beef imports from the U.S. to boost Tyson’s segment sales and profits, with implications for efficiency that should extend long term. The Chinese customer also favors higher-value beef cuts. As such, we plan to lift our 2% long-term segment margin forecast by about 50 basis points, with deterioration still anticipated from fiscal 2017-18 levels as conditions normalize and the continuing U.S. consumer shift away from red meat progresses.

In chicken (about 30% of fiscal 2016 sales), Tyson saw 3% top-line growth and a 13% segment margin year to date, with strong performance despite improved availability and lower prices for competing proteins. We have a favorable view of the firm’s shift toward specialty products, including the extension of its no-antibiotic lineup into food service. Though we expect price premiums to erode as availability improves, specialty items offer processors an opportunity to differentiate in a commodity industry. We expect Tyson’s chicken segment margin to stabilize at around 10% long term as currently low input costs normalize.

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